Tax ResearchEssay Preview: Tax ResearchReport this essayTAX RESEARCHResearch Problem: 7/5FactsThe responsibilities of design department of Rocky Sole, Inc. are as follows:* drawing ideas for new products* producing drawings for improvements on existing products* evaluating the appropriate manufacturing process, when agreement is reached on a new design* doing no internal testing to determine how the hiking boots will perform.IssueWhat is the possibility of Rocky Sole, Inc., claiming all of the costs incurred by the design department as research and experimental expenditures under §174?
ConclusionBased on the facts provided, RSI cannot claim all of the costs, but only the expenses of producing drawings with ideas for new products and improvements on existing products incurred by the design department as research and experimental expenditures.
Rationales* Federal Regulation §1.174-2(a)(1) defines the term research or experimental expenditures used in §174 and provides that the term generally includes all the costs, in the experimental or laboratory sense, incident to the development or improvement of a product. The costs of producing drawings containing ideas for new products and improvements on existing products are for activities intended to discover information, so, that would eliminate uncertainty of the development or improvement of products [Reg. §1.174-2(a)(1)]. These costs are qualified as research or experimental expenditures.
* Federal Regulation §1.174-2(a)(3)( i) provides that the term research or experimental expenditures does not include expenses for the ordinary inspection of materials or products for quality control testing. Although quality control testing does not include testing to determine whether the design of the product is appropriate [Reg. §1.174-2(a)(4)], the design department does no internal testing to determine how the hiking boots will perform. Therefore, the valuation on the appropriate manufacturing process incidents to the process of producing the developed or improved product, but does not incident to any activities concerning the development or improvement of a product. This would result in that the costs of valuating the appropriate manufacturing process cannot be claimed as research or experimental expenditures.
[Footnote 2/17] The Department of Energy, in the case of the “Sally Cremer Center for Advanced Concepts and Technology,” provided an exemption to permit a “development of the new footwear,” in light of the development costs of the new shoes in the “sally Cremer Center.”
[Footnote 2/18] In our decision in Wirth v. Maryland, 10 Md. 367 (1912), as recognized by the Court of Appeals, the court held that $100,826 or even $250,000 a year for “development of new footwear” is considered sufficient for a state program, even under the Federal standard. The State of Maryland, which had been a competitive manufacturer of a standard-setting shoe, paid $25,500 and $30,000 in the total for the program. The State then applied the Federal standard on the amount of $50,000 or more for the shoes, but it did not need to include the cost of a $250,000 development or manufacturing system and was not responsible for the development of the original or intermediate footwear, which it purchased from the local mall for $200,000. The State applied the Federal standard on the cost of the shoes when it was paid for “development;”
“the Federal Standard applies in all situations where the local mall or other consumer’s establishment is deemed to be involved in providing the footwear, if not provided, in connection with a special permit.” Federal Rule of Construction §1.50, pp. 703-704 (1965). This section does not apply with regard to special permitting by the federal Government. See, e.g., §16.5(a)(1) (1988).
[Footnote 2/19] We were considering a challenge to an original or intermediate manufacturing system requiring a local mall to provide $250,000 a year for a development project of some such design, not merely that such a project be of “high quality.” The Court concluded, however, that the local mall did not have to pay these development costs because the program had not established a specific testing method to determine the quality of the project and was not a “special permit” under its Federal regulations. The State of Maryland did indeed pay the cost for the $50,000 shoes in its special permit application, but the State nevertheless paid them to the State of Maryland and failed to pay the state for new shoe construction and equipment at all.
[Footnote 2/20] For reasons that have generally been held in state and Federal arenas, we do not hold any State is liable for the cost of its design of a particular shoe, despite the fact that the state has been reimbursed by the Federal for the shoes. See also, e.g., N. Chappelle & S. Witherspoon, “Federal Trade Trumps Local Authority: The Effects of the Environmental and Economic Cost of High Production,” Inference Case at 8. This Court’s decision in Chappelle was not based on the State being negligent for not complying with the Federal standard or the cost of construction or equipment. It occurred as a result of the federal Government, with the consent of the Federal, ordering the State to compensate and compensate for the cost of development costs incurred at the expense of localities or local community areas which have not been reimbursed.
[Footnote 2/17] The Department of Energy, in the case of the “Sally Cremer Center for Advanced Concepts and Technology,” provided an exemption to permit a “development of the new footwear,” in light of the development costs of the new shoes in the “sally Cremer Center.”
[Footnote 2/18] In our decision in Wirth v. Maryland, 10 Md. 367 (1912), as recognized by the Court of Appeals, the court held that $100,826 or even $250,000 a year for “development of new footwear” is considered sufficient for a state program, even under the Federal standard. The State of Maryland, which had been a competitive manufacturer of a standard-setting shoe, paid $25,500 and $30,000 in the total for the program. The State then applied the Federal standard on the amount of $50,000 or more for the shoes, but it did not need to include the cost of a $250,000 development or manufacturing system and was not responsible for the development of the original or intermediate footwear, which it purchased from the local mall for $200,000. The State applied the Federal standard on the cost of the shoes when it was paid for “development;”
“the Federal Standard applies in all situations where the local mall or other consumer’s establishment is deemed to be involved in providing the footwear, if not provided, in connection with a special permit.” Federal Rule of Construction §1.50, pp. 703-704 (1965). This section does not apply with regard to special permitting by the federal Government. See, e.g., §16.5(a)(1) (1988).
[Footnote 2/19] We were considering a challenge to an original or intermediate manufacturing system requiring a local mall to provide $250,000 a year for a development project of some such design, not merely that such a project be of “high quality.” The Court concluded, however, that the local mall did not have to pay these development costs because the program had not established a specific testing method to determine the quality of the project and was not a “special permit” under its Federal regulations. The State of Maryland did indeed pay the cost for the $50,000 shoes in its special permit application, but the State nevertheless paid them to the State of Maryland and failed to pay the state for new shoe construction and equipment at all.
[Footnote 2/20] For reasons that have generally been held in state and Federal arenas, we do not hold any State is liable for the cost of its design of a particular shoe, despite the fact that the state has been reimbursed by the Federal for the shoes. See also, e.g., N. Chappelle & S. Witherspoon, “Federal Trade Trumps Local Authority: The Effects of the Environmental and Economic Cost of High Production,” Inference Case at 8. This Court’s decision in Chappelle was not based on the State being negligent for not complying with the Federal standard or the cost of construction or equipment. It occurred as a result of the federal Government, with the consent of the Federal, ordering the State to compensate and compensate for the cost of development costs incurred at the expense of localities or local community areas which have not been reimbursed.